State officials say Kansas credit strong despite downgrade

Moody's downgraded debt on one Kansas program

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Administration officials remain confident that Kansas will retain a strong credit rating despite a recent downgrade on previously issued bonds and concerns about the impact of cuts to state income tax rates.

Moody’s announced June 25 that it was downgrading nearly $200 million in outstanding debt in a Kansas Department of Commerce’s program known as Investments in Major Projects and Comprehensive Training, or IMPACT. The program was placed under watch for possible downgrade in March.

The downgrade lowered the rating on the bonds from Aa3 to A3 with a negative outlook, meaning analysts at Moody’s see the potential for increased risk based on state policies.

Eileen Hawley, spokeswoman for Republican Gov. Sam Brownback, said Friday that the state’s bond health is good, confirmed by recent ratings by both Moody’s and Standard & Poor’s. Moody’s has given Kansas an Aa1 rating while Standard & Poor’s rates the state AA+.

Hawley said while Moody’s has raised concerns about the IMPACT bonds, the state has other revenue sources to repay those obligations.

“Kansans pay their debts, and so will their state government,” Hawley said. “However, reducing taxes and allowing Kansans to keep more of their own money is a better fiscal policy than high tax rates and more borrowing. We are confident about the continued strong issuer credit rating for the State of Kansas.”

But House Minority Leader Paul Davis, a Lawrence Democrat, said any increased cost to borrowing money was another example of why income tax cuts enacted in 2012 and 2013 were wrong.

“Since the Brownback tax plan was signed into law, sales taxes are up, property taxes are up, utility rates are up, college tuition costs are up, while school funding is severely down,” Davis said. “The price of Sam Brownback’s narrow agenda is just way too steep for everyday Kansans to bear.”

Kansas stopped issuing bonds in the IMPACT program effective Dec. 31, 2011, replacing it with another program. IMPACT was aimed at providing training to new workers or workers who would otherwise be displaced from their jobs. The bonds are repaid through income taxes collected on the workers who received the training.

Dan Lara, spokesman for the Kansas Department of Commerce which administers the program, said the downgrade didn’t have an immediate effect on the bonds that have been issued.

“We are working on ways to improve the bond rating and mitigate any future issues that may come up so this situation does not become a wider problem for the state,” Lara said.

Moody’s said the recent income tax cuts put bondholders at risk unless another revenue source to repay the debt is substituted by the state.

Bernie Koch of the Kansas Economic Progress Council said the change in the bond rating was “a black eye for Kansas.”

Koch said the downgrade was of particular note because it skipped more than one level of rating when it was reduced. He said the council warned legislators about the impact of the tax cuts on bond ratings when the cuts were being debated.

“This should have been expected,” Koch said. “I’m afraid this is just one of many negative consequences we will discover as the result of the movement toward eliminating state income taxes.”

Kansas has seen its bond rating cut in the past decade as the economy took a downturn.

The state and national economies were slowing in 2001 then accelerated following the events of the 9/11 attacks and declines in the stock market. The Kansas aviation industry was struck hardest when sales dried up, costing the state thousands of manufacturing jobs. Credit agencies cut the state’s rating as Kansas relied on one-time sources of revenue to fund government operations until resources rebounded.

In 2010, Kansas raised the state sales tax rate to 6.3 percent from 5.3 percent to boost revenues during the Great Recession. Brownback and the GOP-controlled Legislature maintained part of that increase in the 2013 tax changes, reducing the rate to 6.15 percent along with other tax adjustments, to generate an estimated $777 million over the next five years.

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Citing the projected possible decline in state revenue stemming from big income tax cuts, Moody’s Investors Service downgraded bond ratings for a Kansas Department of Commerce program that used to pay for a worker training program.

The lower rating affects about $200 million in outstanding debt for the now-defunct Investments in Major Projects and Comprehensive Training program — or IMPACT — that helped some employers train new workers or retrain existing ones.

“The final maturity on the IMPACT bonds is 2023, by which time Kansas may have fully removed the income tax,” the credit rating service reported this week. “So far, there is no assurance the state will allocate revenue from a different source or take other steps to protect bondholders.”

The downgrade moves the bonds from a high-tier rating to a mid-tier rating that still remains in the A category of its grading system.

The service says the rating could go back up if the state makes some changes to enhance bondholder security, but it could fall farther if the state does nothing and state revenues fall or the economy falters.

The downgrade follows approval of more income tax reductions signed into law by Gov. Sam Brownback this year after large cuts last year.

Brownback and his conservative allies say the income tax reductions, which included offsetting measures to bring in more revenue by decreasing the value of tax deductions, will spur the economy, create more jobs and bring in more state revenue.

The new tax law limits the growth of state revenues to 2 percent and channels additional growth toward more income

“I place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt.” – Thomas Jefferson

The radical Republicans who now rule Kansas often hail Jefferson as an icon of their small-government dogma but have not heeded his warning.

In their struggle to clean up the financial mess they created one year ago, Gov. Sam Brownback and his political allies focused on taxes and spending and gave little attention to the impact of their actions on state borrowing. Their inattention could damage the state’s credit ratings for the long term.

Kansans may not be aware that over the past 25 years their state government has aggressively issued debt to address its obligations. As of July of last year, the state had $3.2 billion in tax-supported debt on its balance sheets – an amount that is more than twice that of our surrounding states, both in terms of per capita debt and debt as a percentage of state personal income.

Brownback has continued along this path. During his governorship, he has signed off on $660 million in new tax-supported debt and plans to issue another $360 million this year and next. In addition, he has supported $580 million in new borrowing financed by other state revenues.

Kansas has historically managed its debt professionally and maintained rock-solid credit ratings. However, Brownback’s perilous tax experiment has placed state finance on an unsustainable course, with state government now projected to spend more than it takes in this year and each of the next four years until it goes underwater in a sea of red ink. And shaky finances will assuredly weaken the state’s borrowing capacity – eroding credit ratings and raising the cost of borrowing.